Chapter 20:Federal Water Ploicies and Irrigated Agriculture

Chapter 20-
Federal Water Policies and Irrigated Agriculture

by Garrey E. Carruthers, Thomas G. Bahr, Herbert H. Fullerton, and Norman H. Starler

Abstract

The cornerstone of this administration's water policy is that control of this nation's water resources is a state's right. Primacy in water allocation and management decisions should continue to rest with the states. Federal water policy should emphasize the importance of strengthening partnerships between federal and nonfederal interests in water development and use.

The introduction to this chapter offers the hypothesis that overregulation and distortion of water markets impair the ability of irrigated agriculture in the semiarid West to respond to changing economic conditions. The second section introduces a working concept of maintaining long-run agricultural viability through application of market incentives; the third section addresses water allocation decisions and economic development as related to long-run adjustments to resource scarcity; the fourth section briefly reviews historic federal policies on supply augmentation, cost recovery, feasibility determination, and expenditure priorities; and the fifth section outlines an opinion on what direction emerging federal policy should take. A discussion of recent federal actions provides a preview of opportunities for joint ventures and cost sharing while placing greater reliance on market transactions and water transfers.

The chapter concludes with reference to the need for balance in federal and nonfederal roles in the development of agricultural water supplies in the semiarid West. Emphasis is placed on deregulation of water markets which heretofore may have limited the ability of nonfederal entities to make full use of the market in resolving water scarcity problems.

Historically, the development of water resources has been crucial to settlement, expansion, and diversification of the economic base of the semiarid western United States. For more than 100

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years, individuals, businesses, states, and the federal government have worked with demonstrable success in implanting technologies and creating institutions within these regions which have led to development, control, and utilization of scarce water supplies. Testimony to the success of these efforts is the 20 million acres currently under irrigation in the United States, and the fact that cost-efficient project development opportunities have become less plentiful.

Since the late 1930s, many semiarid regions of the West have experienced very rapid nonagricultural expansion and concurrent large increases in water demand. Continued growth of similar magnitude suggests a future with increasing competition and higher cost for water. Because irrigated agriculture is currently a majority user of relatively low-cost water supplies, projections of continued growth cause some to question agriculture's long-run ability to remain competitive with other users. Clearly the emerging physical, economic, and political realities surrounding the supply and demand for water resources will have significant bearing on water cost and availability to agriculture, and ultimately on the shape of federal water policy.^[1]

The central theme for this chapter is that the long-run ability of irrigated agriculture to remain economically viable and thus to compete without subsidy for limited water supplies will be enhanced by placing greater reliance on markets to guide water allocation and investment decisions. The relative wealth and long-run economic viability of irrigated agriculture are inextricably woven into the question of who pays the cost of access to water, and what conditions, if any, are attached to transfer of water service to other users. The basic assumption which underlies this assertion is that traditional federal water policies have followed a pattern of emphasizing developmental objectives (settlement, cheap food, economic stability, foreign exchange) and federal financial responsibility for water development, without sufficient regard for their market-distorting effects which reduce resource use efficiency, economic efficiency, and water resource value. Such an emphasis facilitates maintenance of institutions, contractual arrangements, and water pricing which discourage further definition of transferable property rights to water and water service, thus foreclosing opportunities for state water laws to function as designed. It also encourages capital-intensive solutions to water problems, and a continuing expectation that leadership in solving water problems rests primarily with the federal government.

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The current administration places primacy in water allocation and management with the states, and seeks a true partnership with states and other nonfederal water interests in the planning, finance, and development of water projects. Greater reliance on private water markets will also require (1) recognition of private property interests in federal water service, including third party interests, (2) selective removal of federal distortions to water markets, (3) further definition of conditions for transfer of water use, and (4) encouragement of projects which overcome physical barriers to market transfers.

Agricultural Viability

In keeping with the general theme of this volume on the impacts of limited new (emphasis added) water for agriculture in the semiarid West, the question of agricultural viability is addressed within the context of increasing competition and higher real prices for existing water. In farming, just as in any other business, the market provides the ultimate test of long-run viability. Long run viability requires the ability to turn a normal profit after paying for all those inputs needed in a farm operation, including payment for labor, equipment, the use of money, fertilizers, fuel, pesticides, and water. Although the prices and quantities of water used vary significantly among crops and service systems, water as an input to agricultural production averages from 5 to 30 percent of total input costs. When the price and availability of these inputs change, it is reasonable to expect that the nature, limit, and the location of farm activities might also change. The difference between water and most other farm inputs is that water, especially in cases which involve change in point of diversion and/or use, is restricted administratively through public institutions rather than by the market. The federal government, rather than acting as a financially rational lien holder, acts as an owner without market incentives. Although state laws contain certain administrative restrictions, in many cases they do provide for financially rational behavior.

To the extent that the priorities guiding administrative allocations are coincident with those that would be assigned by a functioning market, economic viability will not be arbitrarily affected. Fortunately, the water laws and administrative procedures of most arid states have allowed, if not encouraged, transfers of water in response to market incentives. Such transfers

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encourage efficient water use and increase the availability of existing supplies. With the addition of federal projects, these market incentives may be seriously distorted by subsidies, and restriction on transfers embodied in contract terms.

A central question is what would happen if competition for water supplies caused the supply of water for agriculture to be diminished; the further question is what adjustments in agriculture might be expected when water becomes more expensive. Given an increase in price or cost of water, farmers would likely respond by substituting other inputs for the more expensive water, and by adjusting cropping patterns to reduce acreage or to discontinue producing crops with low value return to water.

Moreover, farmers would become highly receptive to management practices and technologies which use water more efficiently. These adjustments are already happening on a large scale throughout the western states. Ultimately, one would expect that crops which are no longer profitable in a given area will either be produced elsewhere or possibly not all. Thus, the economic realities of increasing competition for water will continue to change the character of agriculture in the semiarid West. The type of agriculture which remains profitable and is competitive with other industries for water and other scarce resources will remain viable.^[2]

Water Resource Allocation and Economic Development

Economic development is enhanced by efficient use of water. In rapidly growing areas such as the western United States, decisions to allocate and transfer water among competing uses will have to be made whether water markets are allowed to operate effectively or not. What is important is the question of whether or not these decisions lead to efficient use of water. Some observations in this regard are:

1) Competition for water and other scarce resources is a fact of life.

2) If water is scarce and marketable, it will move in the direction of the highest value use as reflected by the highest bid.

3) Voluntary transfer of existing and new water supplies in response to market prices enhances economic

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efficiency, encourages economic growth, and increases the value of the nation's water resources.

4) Unnecessary restrictions on water transfer (market distortions) inhibit economic growth, reduce economic efficiency, and reduce the value of the nation's water resources.^[3]

5) Removal of market distortions, including assurance that current users and third parties are compensated for any reduction in their use of water, will increase the availability of water to high value users.

Market-based reallocations will most likely result in an economy in which a larger fraction of water is used in the nonagricultural sector. Given an initial 85/15 agriculture/nonagricultural water distribution, a twofold expansion of nonagricultural use would reduce this ratio to 70/30. Numerous studies have demonstrated that adjustments in this range would not seriously affect agricultural viability, i.e., a total economy on a state or regional basis. However, this is not to say that some small areas with a history of groundwater mining and very rapid nonagricultural growth would not be seriously affected. In the long run, alternatives for resolving these scarcity problems should not emphasize federal regulation of use and further subsidization of water price when there is potential for making the necessary adjustments in resource use with voluntary transfer of ownership between willing buyers and sellers.

Historic Federal Water Policies

Supply Augmentation

An historical look at federal water policies may be useful to demonstrate the potential of moving toward a market emphasis. In the past, federal policy emphasized supply augmentation primarily through constructing storage and conveyance facilities. Major emphasis was on development of arid regions in the West. Under the Reclamation Act of 1902, the focus of the Bureau was to increase the supply of water available for irrigation. As the West was developed and as demand for water increased, supply augmentation served de facto as the primary means of solving the problem of getting water to those who did not have it. Supply augmentation picked up the slack, and little water was transferred from one use to another. As a result, a variety of institutions and contractual arrangements were created to

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administer these federally augmented water supplies. The primary purpose of these institutions and contracts was not to encourage market transfers, but to assure project repayment and to administer new water supplies.^[4] Indirectly, water marketing among users and uses was discouraged because of overt restrictions or prohibitions on transfer.

Project Cost Recovery

Gradually, as population and industrial activity expanded, the Bureau of Reclamation, as well as other federal water development agencies, added additional project purposes such as hydropower (beyond irrigation pumping needs), flood control, and municipal and industrial water supplies. From its inception, project cost recovery was a central feature of the Bureau of Reclamation programs. However, the extent of repayment varied by project purpose. Irrigation beneficiaries traditionally repaid allocated construction and operation and maintenance costs. Hydropower and municipal beneficiaries repaid construction cost plus interest. In contrast, flood control was provided by the federal government without requiring repayment from beneficiaries. However, extended repayment terms, transfer of power revenues to cover part of irrigation construction costs, and congressionally authorized exemption from interest charges significantly reduced agriculture's repayment obligation.^[5] The Congress, in authorizing Bureau projects, chose to pursue developmental objectives which placed little emphasis on the implications of repayment arrangements on market incentives.^[6]

Project Feasibility

As the best project sites were developed, the cost for additional multipurpose projects increased, thus placing greater demands on the U.S. Treasury. Closer public scrutiny evolved quite naturally because project investments were evaluated at less than market rates and direct beneficiaries were not required to pay the full costs including interest. The combination of higher costs, public subsidy, and a call for closer scrutiny of public water projects stimulated attempts to provide more realistic preassessment of the economic efficiency of planned water supply projects using benefit/cost analysis. Although these analyses attempted to impose the discipline of the market in measuring project benefits from vendible and nonvendible project purposes against project costs, numerous problems have been encountered in their application and interpretation.

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Three observations are relevant in this regard: (1) some analyses overestimated benefits by double counting,^[7] (2) anticipated agricultural development did not take place in some project areas, resulting in underutilized water presently in storage,^[8] and (3) follow-up on past analyses and a survey of current analyses indicates that, given current economic indications, the number of economically feasible multipurpose project sites is somewhat limited.^[9]

A federal response which addresses the problem of declining and questionable benefit/cost ratios with sole emphasis on either new structural means, or on conservation and nonstructural solutions to water scarcity, is too narrowly drawn. Predictably, the singular emphasis on restricting demand, to the exclusion of the supply side, by the previous administration did not succeed.^[10] The current administration advocates a balanced policy that recognizes both supply and demand-i.e., a market-oriented approach.

Examples of Market Distortions

Despite the fact that the reclamation program was not intended to encourage markets but to settle and develop the semiarid West, some authors have taken the position that it has directly and/or indirectly prevented markets from functioning efficiently. For example, Rucker and Fishback argue that attempts to enforce the 160-acre^[ limitation ignored economic realities of irrigated agriculture in the U.S. economy and distorted the market.^11] Typical land and water adjustments were precluded by the Act, creating the so-called "excess lands" problem for owners of more than 160 acres (320 acres for a couple).

To obtain water, owners of excess land were required to sign a recordable contract in which they agreed to sell these lands within a specified time period. However, the sale price was restricted, by law, to the land value with improvements excluding water supply. This restriction of price on excess land removed incentives for landowners to sell to others who were or would be in compliance with the acreage limitation and thus eligible to receive reclamation water. At the same time, it provided strong incentive for the landowner to seek arrangements that provided legally defensible means for obtaining water service. Rational behavior on the part of reclamation administrators dictated that they would accept these arrangements and provide water service to the excess lands. This contractual arrangement ensured that the stated federal goal of obtaining project repayment was met.^[11] When excess project capacity was present with all costs committed, there was strong incentive to supply water to potential users

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who were willing to pay an amount in addition to operation and maintenance costs.

Historically, water markets have evolved within and along small mutual irrigation companies. Gisser and Johnson argue that the Bureau of Reclamation, in contracting with public irrigation districts to provide subsidized water, contributed to their dominance of water markets and imposed other distortions on these markets.^[12] Districts considered it in their interest to restrict water exchanges for a variety of reasons, including the need to secure their repayment contracts and operations agreements with the Bureau. Gisser and Johnson also document an extension of this rationale wherein an irrigation district used the existence of a repayment contract with the Bureau of Reclamation to block transfer of water rights which predated formation of the district.

Some authors have attributed the lack of reliance on markets, at least in part, to the structure and administration of state water law.^[13] Water demand estimates have been systematically overstated by planners in states where the structure and administration of water law has discouraged voluntary transfers motivated by differential market value. There is general agreement, however, that the appropriation system of water rights used by the semiarid western states is more conducive to market allocation of water than the riparian system. In fact, potential transfers are permitted in some western states, subject only to reasonable protection of third parties. This requires application to the responsible state authority, such as a State Engineer or State Water Board, which has sufficient information and authority to execute water transactions. In other states, transfers require initial recourse to courts which may have access to limited information and be overly sensitive to potential third party damages. An example of this latter situation is cited, regarding court decisions in which users of irrigation water under the laws of Colorado attempted to sell their water rights to the cities of Denver and Ft. Collins.^[14] Traditionally, the federal government has protected third party interests, including international treaty obligations and reserved rights. However, this role did not typically extend to other third party interests, except as they may have been reflected in water service or repayment contracts.

Incentives and Expectations

The primary impact on water markets has been a public perception that the federal government will continue to provide new water supplies at less than full cost. Private investment has

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been discouraged because of federal competition in water development and a continuing expectation among water users that the federal government will provide water services at subsidized rates. There has been very limited incentive to invest private funds in water development when public funds are or may be available.

Recent high rates of inflation and unemployment, combined with an escalating federal obligation for defense and entitlement programs, have increased the competition for federal money. Water development budgets have not been exempted. No new water project authorizations had cleared the Congress since the last omnibus bill in 1977 until the current session. A continuation of congressional trends will likely force adjustments in private sector expectations and consideration of alternative approaches to water resource development.

Emerging Federal Policy

An Overview of Direction

Federal policy regarding water supply should emphasize fuller reliance on water markets. This means that:

1) Institutional arrangements should be reviewed with the thought of encouraging voluntary market-based reallocation of water, both within fully utilized water systems and from currently underutilized water systems.

2) The extent of property interest in water on the part of current users should be unequivocally specified by the states.

3) Reductions in water use must be voluntary, with compensation mutually agreed by the contracting parties.

4) Development of new water supplies must involve joint ventures between nonfederal and federal entities to validate economic feasibility conclusions, to ensure financial feasibility, and to specify the federal role.

At this time, the extent of voluntary exchanges where the federal government has involvement appears to be limited. In some instances, contractual arrangements between the Bureau of Reclamation and states or other contracting entities have been

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cited as discouraging and in some cases prohibiting transfers between users, even within the same water service system. Such contractual arrangements create strong negative incentives for efficient reallocation of water supplies, because they prevent water users from seeking and receiving compensation for reducing water use. Sale of water is encumbered by uncertainty concerning repayment obligations to the federal government, maintenance of what may be excessive protection of third party interests, and the absence of clearly defined property interests of current users in federally supplied water. Clearly, definition of property rights becomes the primary consideration. If the role of the public sector is restricted to that of financier, then a lien on water and associated facilities is all that is necessary to protect the public's investment. However, the traditional federal role has been that of developer as well as financier. Thus, there was strong incentive to establish and maintain control of water and water rights as well as facilities.

The federal government has taken a first step in the clarification of ownership rights by renouncing the concept of nonreserved water rights for federal purposes, and reaffirming the supremacy of states in the management and control of water. The Interior solicitor concluded that a federal reserved water right was limited to the purpose for which Congress reserved the land, and that the federal government would have to apply to the states for other purposes.^[15] Prior to this decision, the federal nonreserved water rights doctrine cast doubt on individual water rights granted by the states.

Other steps directed to establishing a market orientation for water either already under way or which should be considered are: (1) encouraging sale of underutilized water and storage capacity; (2) encouraging more states to recognize rental or interim sale of water as a beneficial use, in a way that would not reduce the certainty of existing legal claims on water supply; (3) supporting development of institutions, such as water banking, which facilitate market-oriented groundwater and surface water transfers; (4) encouraging joint ventures for the development of new waters; (5) negotiation of new federal/nonfederal water service contracts based on current market value and past commitments; (6) implementing the new full-cost water charge provisions of the 1982 amendments to the Reclamation Act in such a way as to encourage efficient utilization and cost recovery; (7) quantification of federal water rights; and (8) settlement of Indian water claims. Further discussion is limited to the first four steps identified.

Sale of Underutilized Water

Under Bureau of Reclamation management, some water is not being utilized for the intended project purpose. In 1981 the Bureau adopted water marketing policy which encourages states to identify potential markets for underutilized water. An example of this is the attempt to implement an agreement between the state of South Dakota and Energy Transportation System, Inc. (ETSI), which was sanctioned by the Bureau. This would use water from the Oahe Reservoir for a coal slurry pipeline from Wyoming to the southern states. This represents a small portion of water for which potential agricultural uses would be foregone. Nebraska, Iowa, and Missouri have taken exception to this proposal, indicating that their future utilization of Missouri River water would be impaired.^[16] The ETSI contract appears to be a move in the direction of market incentives. However, it illustrates that such transfers can be accomplished only with adequate consideration of third party interests. Voluntary agreement among all parties affected by ETSI was not attained and therefore the courts must provide the decision. This decision will further define the extent of third party interests across state boundaries.

Sale of Storage Rights

An example of a sale or use transfer is the June 1982 sale of conservation capacity in the Bureau of Reclamation's Bonny Reservoir to the state of Colorado. The state will use about 40,000 acre-feet for recreation, fish and wildlife purposes which were initially scheduled for use as irrigation storage. Flood control is the primary purpose of the facility and conservation storage was included for future development. Sale was made possible by the conclusion that irrigation was not a feasible addition. A more typical market situation would have provided the opportunity for other interests to be represented in a competitive bidding process. However, this transaction between public entities, although outside the usual definition of markets, encouraged more efficient use of reservoir storage capacity.

Water Banking

During the drought of 1977, there was cooperation in California among local water districts, the state, and the Bureau of Reclamation Central Valley Project, in facilitating transfers of water via a banking system. Although it has been described as a banking system, it was primarily a system of brokering water. Some

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users sold water and others bought it. Subsequently, water exchanges in nonemergency situations have been documented in California.^[17] The interface of federal projects with these kinds of transfers will be carefully examined, and state suggestions for facilitating this process are welcomed on a case-by-case basis to determine if the federal role should extend beyond that of a lien holder to include developmental responsibility. Traditionally, reclamation investments were made in a developmental context to accomplish western settlement and to diversify the agricultural production base. If exchanges are encouraged, they will result in a de facto limitation of the federal role to that of lien holder rather than agricultural developer, because water service would not be restricted to irrigation. To the extent that current water users are allowed to capture the difference between current use values and any higher value uses, their wealth position will be improved by placing greater reliance on markets.

Water as an Item of Commerce

The High Plains (Ogallala Aquifer) studies have been completed and their findings are being reviewed.^[18] In this context, the Bureau of Reclamation is assessing technical assistance to the states that might be made on integrated ground- and surface water utilization. Determining the extent of market opportunities is an important part of this review. Also, state and interstate concerns relating to potential market solutions are already being addressed in the courts. The recent Sporhase decision of the U.S. Supreme Court, along with follow-up actions, will clarify the potential for marketing water across state boundaries. In this case, an individual's farm straddles the border of Nebraska and Colorado. The farmer's right to pump water from an aquifer in Nebraska to provide a water supply to the portion of his land in Colorado was at issue, since Nebraska law prohibits out-of-state transfers to states that do not have reciprocal agreements. Colorado did not have such an agreement. In this litigative process, one question became that of determining whether groundwater was an article of interstate commerce which should not be restricted by another state. The Court ruled that groundwater was an item of commerce, but still allowed that a state may ban water exports if the ban is "narrowly tailored" to the goal of conserving water.^[19]

Joint Ventures for the Development of New Water Supplies

In addition to facilitation of voluntary exchange of water supplies, the federal government will continue to have a role in new water augmentation plans. However, this role should be limited to joint federal/nonfederal partnerships where nonfederal entities (project beneficiaries and state and local governments) validate feasibility determinations by making a financial commitment to the project, thus diminishing the responsibility of the federal sector both as financier (lien holder) and as developer.^[20] Given a feasible project plan that includes related economic, social, and environmental costs, a willingness on the part of nonfederal entities to participate in financing provides ultimate project validation. This is commonly referred to as cost sharing.

These joint venture agreements should contain clear statements of ownership rights which make provision for transfer of water, repayment, and O&M responsibilities. The underlying assumption is if a potential project water user really believes he needs and can profit from the new water to be developed, he will pay for it either up front or over time or in some combination.

Looking into the future, new water development will likely emphasize catalytic projects, such as those which provide interconnections between existing units or support the optimization of conjunctive use of ground- and surface water systems. Furthermore, these projects will be modest in scale and of an intrastate scope. Therefore, nonfederal entities could more easily play the role of senior partner in a great number of such ventures, or better yet, the sole partner where no significant federal interests are identified.

Joint ventures would be equally appropriate for investments involving the rehabilitation costs on existing water facilities. The long-term assignment of responsibility for these costs is not entirely clear and should be established. As a minimum, rehabilitation of all or parts of older multipurpose facilities should be addressed in the same way as new augmentation projects, because they require expenditure of new money and should be subjected to feasibility tests and cost sharing guidelines. Joint ventures impose a market test of economic feasibility. By extending greater responsibility for finance and repayment to states, the source of repayment beyond that provided by direct beneficiaries must be addressed by the state. Thus, the state becomes an active participant in determining if beneficiary repayment will be sufficient to support the investment. As such, state decision makers must assess the market for vendibles and impute a value for nonvendibles.

Conclusions

It is the policy of this administration that control of this nation's water resources is a state's right. Primacy in water allocation and management decisions will continue to rest with the states. It is the thesis of this chapter that some aspects of both state and federal water policy have resulted in market distortions and reduced use efficiency and value of water resources. The conclusion is that allocation of water resources, both new and those already developed, is best handled by markets which function without unnecessary interference from the public sector. To the extent possible, market distortions which are the responsibility of the federal sector should be identified and removed.

Future water development should fully reflect state leadership in which the federal role is one of cost sharing in those cases where significant federal interests are present. In the absence of state leadership and nonfederal cost sharing, new multiobjective water projects will be limited and increasingly difficult to justify. Initiatives in nontraditional technologies for increasing water supply will also look toward state leadership and joint ventures for research and development.

If water markets operate effectively, the agricultural sector in the semiarid West will continue to be strong and viable. Price incentives and increases in water resource values will encourage individual adjustments in water resource use, with net movement toward high value uses both in agriculture and in the nonagricultural sector. In the longer term, higher water resource values in agriculture should provide an adequate asset base and appropriate incentive to employ the more efficient technologies, improved genetic materials, and a more efficient management which are most essential to the continued viability of the industry.

Discussion on Part IV
Discussion:
Henry P. Caulfield, Jr.

The assumptions on which public policy strategies are based need to be examined, not taken for granted. I, along with others, took for granted certain assumptions in the 1960s and before, which time and experience have proven to be largely false. These false assumptions were: that there were many potential nationally justifiable and publicly salient water resource development projects beyond the substantial developments that had already been built or authorized, or were near authorization; that comprehensive river basin planning and authorizations were the best political means of realizing these potentials; and that water resource development would continue to be strong politically at the national level, through the efforts of key Congressional coalition leaders supported by active and strong interest groups. Other political factors were involved, but without validity of the foregoing assumptions some of the strategies embodied and implied in the Water Resources Planning Act of 1965 were doomed to failure.

A major assumption of this volume seems to be that a western water crisis can be avoided if water transfers to municipal and industrial use are widely permitted, without substantial harm to agriculture, urban and rural social life, and the environment. By implication, a contrary assumption should be false: that the total

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sector-by-sector projections of physical water requirements, compared to total supplies, as set forth in national water assessments for the semiarid West, make water crises inevitable. There appears to be some consensus among the participants in this volume that water use transfers are occurring, and that they will increasingly occur in the future constrained only by respect for third party private interests and necessary and/or desirable public interests. A water crisis, therefore, except in the context of severe drought, need not occur.

Miller and Cardon's analysis of "What Farmers Can Do for Themselves" clearly indicates that farmers have substantial means to avoid harm as water increases in value through market transfers to higher valued uses. Other chapters prepared from different perspectives generally support this conclusion. Also supportive is a fact widely understood that present agricultural use is so large in the semiarid West, compared to quantities likely to be demanded for urban and industrial growth, that such growth will not impinge greatly on agriculture, except in particular areas (e.g., in the Upper Colorado River Basin in Colorado and Utah if and when oil shale and coal production are greatly expanded). Likewise, urban and rural life, except in particular areas, will not be substantially affected. But lack of harm to instream environmental values, as offstream consumptive use of water is intensified, is not so clear. The implications of greatly intensified competitive use of water in the West need more thorough examination, in my opinion, as to the adequacy of existing environmental federal, state and local public policies.

The major thrust of the policy chapter from the federal perspective by Carruthers et al. is that the control of the nation's water resources should largely be in the states and that "the long-run ability of irrigated agriculture to remain economically viable . . . will be enhanced by placing greater reliance on [economic] markets to guide water allocation and investment decisions." The authors appear to assume that the western states will increasingly want to exercise their water management responsibilities by fostering economic market transfers in water use, largely unconstrained except by third party and other equitable interests. Thus federal policy should be directed toward removal of restrictions in reclamation law and other regulations and contracts which inhibit market transfers, while, at the same time, making certain that nonfederal financial obligations to the federal government for reclamation projects continue to be met. No doubt much needs to be done to implement this policy, with which I fully agree.

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"Unnecessary restrictions on water transfer (market distortions) inhibit economic growth, reduce economic efficiency, and reduce the value of the nation's water resources," Carruthers et al. declare, and by implication they assert an appropriate realm of necessary restrictions. However, they don't develop this implication that economic market failures can exist. In other words, political market places may be necessary to allocate values that are not, and cannot be, adequately represented in economic markets. Thus political instrumentalities of law, regulation, and public funds may be required to constrain economic markets in the interest of these values.

More particularly, Carruthers et al. don't recognize present federal and state laws that now constrain economic markets in water rights. What I have in mind generally are environmental laws, including those that provide for wild and scenic rivers, maintenance of low river flow, reservoir recreation pools, protection of endangered and threatened species of fish and wildlife, preservation of wetlands, etc. Within the context of these and other constraints the domain of appropriate federal policy and action is much larger than recognized by the authors. The assertion that "control of this nation's water resources is a state's right" calls for an enlargement of the administration's concept of federal-state water resources partnership.

Governor Schwinden's remarks on state and local public water policy pertain directly only to Montana. At least two major points, however, are of widespread western concern. The first is his reference to "use it or lose it." Montana seems particularly concerned at this time that downstream out-of-state use of water is going to preclude future consumptive use in Montana of that water, unless definite legal and developmental steps are taken now to preclude downstream claims. This is a widespread problem which, in many interstate river basins, has been settled by interstate water allocation compacts and judicial decrees.

"Use it or lose it," however, represents a widespread intrastate problem in the semiarid West, which affects water conservation opportunities and the ability to make economic market transfers of conserved water and consequent economic gains. The problem is caused by the fact that water rights are most often expressed in cubic feet per second for a prescribed period of time-a flow right. The consumptively used part of that flow right, at least in Colorado, can be rented or sold. Thus a farmer attempts to own and keep flow rights equal to his maximum plant needs at particular times in the growing season; he tends to over-appropriate

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and over-use early season water. If his water right were stated in terms of acre-feet per year and deliverable in specified quantities upon demand he could control his conserved water to the amount actually needed, and thus minimize his demands upon the system.^[1] He could then transfer to others, with financial benefit to himself, the water he did not really need. Such a change, however, could affect present return flows upon which downstream junior rights are based and would be opposed by those otherwise adversely affected. Also, such a change could require increased water storage capacity to provide intrayear water releases upon demand, not to exceed the acre-foot right.

The second major point in Governor Schwinden's remarks is further development of state water resources. In addition to Montana, several states have recently taken action to participate financially in proposed federal projects, or to develop further their water resources through state cooperation with local public bodies and private enterprise without federal financial involvement. Among states taking such action are Wyoming and Colorado. California and Texas, of course, have long had such programs.

At the National Water Resources Conference, Washington, D.C., in April 1975, I asserted that "the federal water development program (both in the East and in the West) is politically dying, if not already dead," and went on to explain why.^[2] Several factors are involved in this decline, including what proved to be the invalid assumptions that I and others had made earlier. More generally, it can reasonably be asserted that the rationale for federal water resource development is no longer as convincing in Washington, D.C., as it was previously for over a hundred years. There is no longer a sufficient constituency for its support in a nation that is increasingly urban.

The Carter Administration's well-known dissatisfaction with federal water projects became manifest through its "hit list," calls for reduced use to solve water supply problems, and "principles, standards and procedures" which very few, if any, proposed water projects could satisfy. President Reagan in his 1980 campaign strongly favored federal water projects, particularly in the West. His Administration has appeared to loosen "principles, standards and procedures" and has taken some steps to authorize projects, but very reluctantly in the face of federal budget problems. Both the Carter and Reagan Administrations have assumed that the key to new water projects is up-front cost sharing with states, local governments, and private interests. Both

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have ignored the fact that the old political epithet of "pork barrel" now appears to signify widely to the public, particularly in the East, that no federal water project is ever valid. Both have ignored the more fundamental national political factors which are important regardless of reform in cost sharing policies.

Instead of the type of technical and financial partnership set forth in the paper by Carruthers et al., why does the Reagan Administration not jettison much of the federal water resources development program as a manifestation of its New Federalism, and take widespread political credit for abolishing "pork barrel?" Its 1980 campaign commitment in the West to favor federal water projects could be one reason; but with skillful preparatory work and leadership, this hurdle surely could be overcome.

Federal block grants could effectively aid water supply and water quality investments made by state and local governments. This financial aid could take the place of some nonreimbursable investment in federal water projects. It could also take the place of federal grants in connection with public sewage treatment projects; could be used in rehabilitation of urban and rural water supply systems, and rehabilitation of old, or investment in new, irrigation projects; and could be used to meet present standards of dam safety and to interconnect water systems to facilitate transfers of water rights.^[3] No doubt it would be a difficult problem to devise a formula for allocation of block grants among the states, but this problem, in principle, is no more difficult of solution than it has already been for the highway program, community development, social services, and others.

States and local governments, with staff supplemented by private engineering organizations, are certainly technically capable of replacing staff of the Bureau of Reclamation and the Corps of Engineers. Also, state and local governments generally have authority (but differ somewhat among them) to finance investment costs by revenue and general obligation bonds, particularly where repayments can be met efficiently by user changes and property taxes. Financial aid via the federal block grant is often needed where investment costs cannot be so met (e.g., recreation and enhancement of fish and wildlife).

This concept of partnership between federal, state, and local governments appears to me to be more politically feasible than the partnership proposal apparently now being developed within the Reagan Administration. Certainly it would implement more fully the Administration's philosophy of New Federalism. In any case, I hope that the assumptions underlying future federal

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water policy will be thoroughly examined and prove to be more valid than those upon which most water policies were based at mid-century.

Discussion:
Carole R. Cristiano

I am pleased to provide some congressional perspective on this most important issue. In the past, the "congressional perspective" has consisted of an upbeat projection, promising increased availability of federal money to construct new projects and an optimistic estimate of project appropriations. This presentation is not in that grand old tradition. To understand why, it is important to first discuss the problems we confront with our national budget, especially the magnitude of the budget deficits. A few facts are very revealing.

1) In FY 1983, our budget deficit could be close to $180 million. That number is higher than the entire FY 1968 budget of Lyndon Johnson, reputed to be one of the biggest spenders in recent history.

2) The FY 1983 budget includes a line item for interest on the national debt. This payment alone will be higher than Johnson's entire FY 1965 budget.

3) The budgetary problems will be compounded in the coming years. By FY 1986, if we pay only for defense, entitlement programs, and interest on the national debt (in effect eliminating all other government expenditures), we will still have a deficit.

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Clearly, Congress cannot eliminate all nondefense discretionary expenditures. But just as clearly, it cannot continue to budget such record deficits. To reduce the projected deficits, the administration and the Congress are confronted with three politically very distasteful options. They can: (1) reduce increases in entitlement programs, including price supports for agricultural commodities; (2) reduce projected increases in defense spending; or (3) increase taxes. Probably they will choose to do a little of each. But each of these decisions is going to take a great deal of time, political capital, and emotional energy. With fiscal problems of this magnitude, Congress will not collectively be predisposed to deal with many other issues, including water development.

One can discuss this political reality in different ways. The chapter by Carruthers et al. took the subtle approach; the authors spoke in terms of new federal-state partnerships, increased cost sharing, and leaner, meaner, smaller, more cost-effective projects. Another, perhaps more western approach is somewhat more direct: blunt honesty. The federal money just isn't there. Maybe it should be, and maybe sometime in the distant future it will be again, but right now it is virtually nonexistent.

Politicians are not generally known for their blunt honesty, so it is unlikely that there will be an official announcement of this new reality. Instead, there will be a stalemate in policy. Those who support a continued strong federal role in project development will block any programmatic legislation which seeks to reduce or eliminate the federal financial role. While there will continue to be laws on the books which require a strong federal presence, each year there will be less money available. Slowly, individual project sponsors willing to be substantially involved in planning and financing projects will obtain authorizations and construct those projects. But all other new projects will be placed on indefinite hold.

The national economy's response to decreased availability of water will not be all that severe. It is not even apparent that the response will be negative. This is also true of decreased federal funding for project development. However, it would be shortsighted to be concerned only with the national economic response. The impacts on regions, on specific areas, and most certainly, on specific individuals, could be very negative and quite severe. We should remember this when we discuss public policy options.

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There is another, less definable, but just as important impact. Agriculture is a significant environmental component of all western life. I myself was raised in Denver and lived a typically urban life, yet the attitudes and values I absorbed were much more typical of a rural agricultural environment than of the urban settings of the East. The ambiance of the West is important, and should be maintained. This may not be a federal goal, but state governments may appropriately consider it a high priority.

The viewpoints in this volume are encouraging. They indicate that state and local governments, farmers, and financial institutions are taking more initiative and responsibility in resolving their problems. Some states have made basic changes in their water laws. Several authors describe a number of technological innovations in farming. Banks will be more aggressive and more responsive to the needs of agricultural borrowers. This kind of self-help will mitigate the negative impacts of declining water availability.

Two areas of thought and activity are worth emphasizing:

1) It must be decided whether it is important to maintain agriculture at its current level. Clearly, in the past we as a nation made a conscious decision to subsidize western agricultural development. It is evident that it is no longer in the national interest to increase or maintain these subsidies. I would not be surprised if such subsidies were gradually decreased in coming years.

In the future, the states will have to determine whether it is in their interest to continue these subsidies. If subsidy is deemed to be appropriate, the level must be decided, and how it should be administered. In Montana's case, severance tax revenues are used for water financing-a very appropriate response to the problem. There may be other available financing possibilities to consider.

2) Although the federal role will clearly decrease in the future, it will not be eliminated. While many legislators are concerned about the problems we have discussed, they are frustrated by their inability to determine which programs should have the highest priority. Deliberation should be given to programs of top priority. Research may be one. The Senate recently passed S. 2494, which provides funds for water research institutes and other water research. We are hopeful that it will also pass the House. Research is important, yet the top priority may be something else, perhaps limited impact assistance. Whatever it is,

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those concerned must decide what the program should accomplish, what a reasonable funding level is, and then work with Congress and the administration to address the legislation. The federal government is unlikely to determine which are the top priorities, or even how the program should work-congressmen are too worried about the impact of voting for decreases in Social Security programs.

Finally, I would encourage the reader to be heartened. Our nation is going through rough times as we withdraw from our addiction to federal funds. But no other group will be better able to cope with changing times and opportunities than residents of the West. Our heritage of independence and frontier spirit has served us well in the past. It will continue to do so in the future.

Discussion:
W. Don Maughan

The country and the West will be best served if irrigated agriculture is maintained at a reasonable level. Expansion will be limited to a few places; there is no major dispute that, from a westwide perspective, water for agriculture is a diminishing resource. Groundwater supplies are being overdrafted, undeveloped surface water supplies are being reserved for environmental purposes, and developed surface and groundwater supplies are being syphoned off for urban and industrial growth. Since the West is blessed with ample good land, good climate, and good markets for irrigated agricultural products, the need for the best possible public policy for irrigated land cannot be overstressed. It must be updated periodically due to changing conditions.

Nevertheless, public irrigation policy has floundered over the past thirty years. I have had firsthand participation in (a) commissions, councils, and interagency committees; (b) the development of multipurpose and multiobjective principles and standards; and (c) the execution of national, regional, and river basin planning. All these have contributed far too little towards adequate solutions to the vital western water need. They have filled books, reports, and auditoriums, have provided a livelihood for many planners and researchers, and have garnered the support of grassroot organizations and associations. But all together they have weighed but lightly upon decision making in both the public and private sectors. That has to change. We must have policies with substance, that decision makers will use.

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We have reached the time when we should candidly categorize what won't work so that we avoid wasting future efforts. It is human nature to seek the easy or well-traveled road. Too many hold out hope for just one more spectacular irrigated agricultural triumph. However, meeting the near and mid-distance water needs of irrigated agriculture will not accommodate those desires, and we should admit it. I would like to review some of these "dead ends."

There is no room for waste of our best talents, energy, and money on promoting large scale interbasin transfer projects for irrigated agriculture. Even after three decades of strenuous efforts, all we have to show are plans for projects that would be too costly, impossible politically, and have major adverse impacts upon the environment. Because such schemes have unusual publicity value, many still insist that massive projects will be the solution for western agriculture. No way! At least not for several generations. Failures of post-World War II attempts to advance long distance importation projects for irrigated agriculture should be clear to all who seek the truth.

There is no room for those who yearn for a return of water successes of the past. It is unfortunate, but nearly all the good dam sites, hydroelectric power sites, and man-made water recreation sites have been utilized. The availability of untapped groundwater resources has all but disappeared.

There is little room for optimism about weather modification, watershed management, or desalination. Taxpayers have contributed hundreds of millions of dollars to basic and applied research and to a few prototype projects with only marginal success. Even those that have survived appear to be of limited value to the future of irrigated agriculture.

Finally, there is no room for regrets. We must take what is available and make the most of it-reuse our treated wastewaters, artificially recharge our groundwater aquifers, conserve, build small- and medium-scale water regulation projects, transfer water supplies to accommodate higher and better uses.

There is room to improve efforts to get the most effective persons elected and appointed to public office, to make and execute public water decisions over the next two decades. Water problems are incredibly complex. If those who decide upon public funding and governmental controls have only superficial understanding of the problems and potential solutions, it will not bode well for their decisions. Professional water people must try harder to speak an understandable, practical language of water needs and programs to those officials.

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The realization has to sink in that we cannot afford to take any aspect of water management for granted. We must be able to improve our use of available water supplies by considering basic changes in water allocations and rights. That is a challenging objective. Arizona's 1980 Groundwater Management Act is an outstanding example of a new, innovative direction, but it requires steps that are not easy to take. We have two years of experience since enactment and there are things yet to be learned. Even so, the legislation may be a bellwether for the ways in which agriculture in an extremely dry state can realistically prepare for its long-range future. In Arizona that will mean less acreage in irrigated agriculture, but the reduction will be on an orderly basis.

There is room to concentrate more attention on the underlying forces for public funding and regulation. These forces determine whether there will be lasting water resources available for western agriculture. Let us brush away myths. We should not be persuaded that national economic development drives the Congress to provide money; national attention to social and environmental issues has been much more persuasive in the recent past. Local and regional economies are extremely important, however, and straightforward approaches to Congress are much more effective than seeking to put proposals in a so-called national perspective. Past water resources appropriations by the Congress demonstrate this fact.

Regulation and management depend upon physical, political, and economic forces. Governmental control has to be based on those facts, and inflexible or impractical regional or river basin policies avoided. Many federal regulations have proven unacceptable over time. State officials must also fulfill their proper roles; federal intervention will not correct weaknesses found in state or local programs. At the same time all states and locals need not carry the same burdens. There is no need for federal involvement in water marketing and transfers.

There is room to demand more useful results, not just promises, from investigations, research, data collection, etc. Planners, researchers, and data collectors jealously guard their domains, but their efforts should be graded by others in their fields, as well as decision makers and managers.

There is room to borrow, adapt, and use successful water ideas originated by others, though there is sometimes great reluctance to do so. We can take lessons in this regard from Japan and other nations.

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These ideas are based on experience and observation, not upon wishful thinking. People engaged in irrigated agriculture need to discern the truth about public water policy; it is important to their future.